Warranty Liability

Chapter 3
Warranty

• a promise by the seller of goods or services that it will provide free

repair service or replacement during a specified period if the
products or services provided are defective.

Recognition of a warranty provision

Under PAS37 a provision shall be recognized as a liability in the financial statements
under the following conditions:
a. The entity has a present obligation, legal or constructive, as a result of past event.
b. It is probable that an outflow of resources embodying economic benefits would be
required to settle the obligation.
c. The amount of the obligation can be measured reliably.
Reliable estimate:

The amount recognized as the warranty provision should be the best estimate of
the expenditure to settle the present obligation. Where no reliable estimate can
be made, no warranty liability is recognized.

Two approaches in recording the warranty expense, namely:

a. Accrual approach
b. Expense as incurred approach
Expense as incurred approach
Sale of warranty
The amount received from the sale of the extended warranty is recognized initially as
deferred revenue and subsequently amortized using straight line over the life of the
warranty contract. However, if costs are expected to be incurred in performing services
under the extended warranty contract, revenues is recognized in proportion to the costs to
be incurred annually.
END OF CHAPTER